A coalition has formed in favour of a review of the Reserve Bank — and it’s quite the mix of disparate forces.
The dramatis personae cover inflation hawks and monetary policy purists, neoliberal commentators, business leaders and business economists, the Coalition and Labor and large sections of the media. As such a varied list suggests, there are a number of agendas at work.
Inflation hawks have been complaining that the RBA is soft on inflation for years, mainly in the pages of The Australian Financial Review before the pandemic. Their argument was that because the economy kept delivering inflation below the RBA’s target band, the target band was obviously too high and needed to be lowered to 1%, or some different kind of target was needed so that the RBA could “normalise” monetary policy by lifting rates.
If the hawks had their way, interest rates would have been much higher before the pandemic and would already be back at 1% or 2% to choke off inflation.
Like monetary policy purists and many neoliberals, inflation hawks are only partly motivated by economic ideology. They’re also driven by a morality shaped by decades of neoliberal economics, which suggests any monetary policy that can be characterised as “loose” is a populist indulgence and ordinary households and workers should be regularly lashed with higher interest rates.
They’re the kind of people who a century ago would have been “sound money men” and demanded a return to the gold standard. Men like Herbert Hoover’s Treasury secretary Andrew Mellon, who instructed his president to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… purge the rottenness out of the system” at the start of the Great Depression.
For neoliberals, many business leaders and the Coalition, however, it is not the RBA’s inflation target that is the problem, but its current thinking. For years now, governor Philip Lowe has elevated wages growth as a key factor in monetary policymaking. Wages growth was too slow for Australian workers, he argued, and needed to lift.
This is in and of itself bad enough in the eyes of business and the Coalition, which has pursued a deliberate policy of wage stagnation to boost business profits.
Lowe went further, however, in saying governments were directly to blame for their public sector wage caps — governments are the biggest employers in the country, and when they impose tight caps on public sector wages growth, it undermines wages growth across the whole economy.
And in speech after speech, Lowe drew attention to the embarrassing stagnation of wages that had occurred under the Coalition since 2013, and urged greater fiscal stimulus to a government that was hell-bent on returning the budget to surplus.
Lowe even spoke heresy last year and enraged both economists and pro-immigration progressives by pointing out that constantly bringing cheap temporary labour into Australia — Coalition policy for many years — undermined wages. The economic establishment, including Treasury, was outraged that Lowe had disputed the neoliberal consensus that open flows of labour across borders was automatically a Good Thing.
But there’s no love for the RBA from Labor, either. Indeed, opposition Treasury spokesman Jim Chalmers was first out of the blocks calling for a review of the RBA last year — way ahead of Treasurer Josh Frydenberg, who only signed up last month.
Labor has two bones to pick with the RBA: one, that it has endorsed the argument, pushed by the anti-superannuation and anti-industry super lobby, that compulsory superannuation increases undercut wages.
Second is the view that the RBA held rates too high for years until 2019, reducing employment, pushing the dollar up and exacerbating wage stagnation.
Paul Keating, who has made his views clear about the critics of superannuation guarantee rises, has also been a strong proponent of that argument. The fact that the RBA did him over with its ill-judged interest rate rises in 1994 just when the economy was getting off the canvas — thus giving John Howard his “five minutes of economic sunshine” line — isn’t irrelevant either.
The media — and journalists often briefed by Frydenberg — are all on board for a review. Not just the AFR but Nine newspapers generally — Nine being chaired by the deeply conflicted Peter Costello, who uses his Future Fund chairmanship to rail at the RBA. Neither he nor Howard have ever forgiven the RBA for increasing rates during the 2007 election campaign — as a direct result of their own profligate spending.
Despite being the party that formalised the RBA’s independence, the Coalition harbours an antipathy towards independent institutions: Tony Abbott was thinking about imposing an outsider on the bank in order to curb it before he was ousted by Malcolm Turnbull.
A Coalition-initiated review of the RBA’s inflation targeting and independence could thus easily be a stalking horse not merely for curbs to its independence but a mandate more amenable to the “liquidate them all” crowd — possibly one with a downgraded commitment to full employment.
There are good grounds for criticism of the RBA: its forecasting of inflation and wages growth has been off for years, but then so has Treasury’s, and that of most forecasters; few in the media even noticed wage stagnation until years after outlets like Crikey were calling it out. In the Through the Looking Glass-style of economic commentary in this country, the RBA wears the criticism even though its accusers all ignored the realities of wages and labour market policies at the time.
And while critics now claim the RBA made a terrible mistake in its ultra-easy monetary policy during the pandemic, few mention that the biggest bungle of the pandemic was Frydenberg’s giveaway of more than $26 billion in JobKeeper payments to companies that didn’t qualify.
Defenders of the bank are few and far between — especially current business-sector board members, or former members of the board. The likes of John Edwards (a former Keating adviser, who yesterday predicted multiple rate hikes this year), Heather Ridout, former Treasury chief Ken Henry, and former RBA deputy governor Stephen Grenville, or Catherine Tanna, a board member for a decade until last year, are silent. CORRECTION: John Edwards has contacted us and alerted us to this piece in Inside Story that we missed – our apologies.
When a wide variety of vested interests all line up to have a crack at an independent body, it’s best to be sceptical of why they’re all so keen to a change from a status quo that has worked relatively well.
